Credit Risk Management Credit Portfolio Management

Question 1

What is the primary goal of credit portfolio management?

Accepted Answer

Optimizing risk-return trade-offs across the entire loan portfolio

Answer

Credit portfolio management seeks to optimize the risk-adjusted return of the entire loan portfolio through diversification and active risk management.

Question 2

Credit concentration risk arises from what?

Accepted Answer

Overexposure to a single borrower, sector, or geography

Answer

Concentration risk occurs when a portfolio is over-exposed to a single counterparty, industry, or region, amplifying losses when that segment deteriorates.

Question 3

Which metric measures portfolio credit risk at a given confidence level over a specified horizon?

Accepted Answer

Credit VaR (Value at Risk)

Answer

Credit VaR estimates the maximum credit loss that will not be exceeded at a given confidence level (e.g., 99.9%) over a defined time horizon.

Question 4

In credit portfolio models, asset correlation refers to what?

Accepted Answer

The tendency of borrowers' assets to move together, affecting joint default probability

Answer

Asset correlation measures how borrowers' underlying asset values move together; high correlation increases tail risk as defaults cluster during downturns.

Question 5

What does 'economic capital' represent in credit portfolio management?

Accepted Answer

The capital a bank internally determines is needed to cover unexpected losses at a target solvency level

Answer

Economic capital is an internal estimate of the capital needed to remain solvent at a target confidence level, often higher than regulatory minimums.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Portfolio Management